Navigating a New Normal: How Banks Can Thrive Amid Regulatory Change
R&T Deposit Solutions
Providing innovative deposit and lending solutions to US Banks and other financial institutions
As a new administration reshapes the regulatory landscape, the banking sector faces a critical period of change across supervision, compliance, and risk. These shifts come at a time when many in the industry feel that regulatory policies have favored larger banks at the expense of smaller institutions.
From brokered deposit rules to the Community Reinvestment Act to Basel III, smaller banks face unique challenges under a regulatory framework that applies the same standards to institutions of vastly different sizes and complexities. This uniform approach overlooks the need for proportional regulation tailored to an institution’s size, capabilities, and risk profile.
For community banks – as well as larger institutions – adapting to evolving policy demands requires fostering open dialogue and transparency with regulators. By prioritizing collaboration and the responsible exchange of information, the industry can balance innovation with consumer protection, ensuring that new solutions strengthen the financial system while mitigating risk.
Traversing the Evolving Banking Regulation Landscape
As regulations continue to evolve, banks must find ways to comply while addressing challenges that can vary significantly depending on their size and operational structure.
Take the Community Reinvestment Act (CRA), which requires regulators to evaluate banks’ lending, investment, and service activities to ensure they’re meeting the credit needs of their communities. Recent CRA amendments acknowledge the growing role of digital banking services delivered through online and mobile platforms. However, these changes also introduce new compliance challenges, particularly for smaller community banks that may struggle with the expanded requirements and data reporting obligations.
While community banks lack the resources of their larger peers, they can take the following actions to level the playing field:
Basel III – a regulatory framework that imposes stricter capital requirements on all banks – also overlooks the practical realities that community banks face. While the Community Bank Leverage Ratio (CBLR) framework aims to reduce Basel compliance burdens for qualifying community banks, fewer than 40% have opted in.[1]
It’s unclear whether this lack of adoption is due to limited resources for evaluating the frameworks benefits or because the 9% reporting threshold is too high. Regardless, Basel III remains complex for smaller banks that either don’t qualify for or choose not to use the CBLR framework.
Strengthening Deposit Stability
While banks don’t have direct control of regulatory policy, they can take proactive steps to meet increased capital requirements, maintain profitability amid uncertainty, and prepare for unexpected disruptions.
Investing in advanced data management systems ensures accurate and timely risk assessment and regulatory reporting, while regular stress testing, paired with long-term capital planning, helps banks stay resilient against both evolving regulations and potential economic downturns.
For community banks, enhancing operational efficiency through automation, growing deposits by strengthening customer relationships, and engaging with local communities can foster deposit growth and improve overall stability. Additionally, stabilizing existing deposits through reciprocal deposit networks – a private-market solution that expands effective deposit insurance coverage by spreading funds across multiple banks – can provide a critical buffer against liquidity shocks and enhance funding stability for participating banks.
Reciprocal deposits proved particularly relevant in the wake of the Spring 2023 banking crisis, which saw the failures of Silicon Valley Bank and Signature Bank, with assets over $200 billion and $110 billion, respectively.
The crisis revealed several critical vulnerabilities in the modern banking system:
Research suggests that broader use of reciprocal deposits would likely have maintained depositor confidence and stemmed the outflow of funds during the crisis. Ultimately, strengthening deposit stability is key to improving banks’ liquidity profile, mitigating systemic risks, and preventing future crises.
A Collaborative Approach to Regulation
The entrance of a new administration and the start of federal banking agencies’ decennial regulatory review period presents an excellent opportunity for regional and community banks to engage in open, transparent dialogue with policymakers. While advocating for specific outcomes can be beneficial, institutions should focus first on fostering mutual understanding, sharing critical information, and collaborating with regulators to protect the interests of the end customer.
A clear and relatable narrative can also make a difference in regulatory discussions. When meeting with regulators, banks can start by relating how their customers’ needs shape their perspective. By openly discussing how regulations impact their ability to serve their communities and sharing real-world examples of customer needs and challenges, banks can help regulators better understand the practical implications of policy decisions.
Regardless of the regulations that emerge, banks should take steps now, including having discussions with their boards and planning for different regulatory outcomes, to stay ahead of potential risks. By preparing for various regulatory scenarios, leveraging private market deposit solutions, such as reciprocal deposits, and thoughtfully engaging with regulators, banks of all sizes can balance financial stability with growth – positioning themselves for long-term success in this shifting landscape.
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Click here for R&T’s list of receiving institutions in the DDM, CDMX and RTID programs. R&T is not an FDIC-insured institution. FDIC insurance only covers the failure of an FDIC-insured institution. Certain conditions must be satisfied for FDIC pass-through deposit insurance coverage to apply.